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Andrew Laming


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Could Political Moves to Stamp Out a Runaway Housing Market Have Big Benefits to Agri?

Feb 12, 2021 2:07:39 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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I love cause and effect. Squeeze a balloon and it will pop out somewhere else. Squeeze it enough and it will pop.

Banking is a bit like that at the moment, but for once in a long time, Agri may be set to benefit.

As you all know there’s heaps of noise about the housing market going up, lots of investor frenzy and yet again the purchase of the ubiquitous family home seems to be getting further out of reach for more families.

Its political dynamite – a hugely populist issue and one that the current Government seems determined to solve.  

 

Why do they need to make changes and step this up a gear?  “It’s the capital, stupid”

The Government has chucked a few traditional things at it (LVR restrictions) and ruled out a few others (capital gains tax), but they aren’t really working. They haven’t in other countries either. That’s because it doesn’t actually address the underlying issue - How ridiculously easy capital is available from banks in the home loan sector. As we say in the office - “It’s the capital, stupid”.

Big picture for a moment, there was massive stimulus last year with the RBNZ supporting the availability of capital to both Government and the Banks by continually expanding its Large-Scale Asset Purchasing (LSAP) to over $100bn (effectively printing money).  

A fair chunk of this money has found its way into the banking sector and the banking sector’s regulations and corporate profitability models are highly stimulative toward home lending. This is simply because:

  1. Its much easier to originate and serve a home loan (paint by numbers for credit departments and once set-in place, they don’t need much review) AND;
  2. RBNZ capital regulations mean a home loan is over 100% more profitable (at the same margin) than one to Agri or Business.

But is all that set to change?

There’s some big sound bites coming from this Government at present. Take these from Grant Robertson:

“We want to tilt the balance towards first home buyers while also incentivising more investment into the construction of homes”

“We all know that building more houses, particularly affordable housing is critical, but we can also do more to manage demand, particularly from those who are speculating”.

“It is the time for bold action. The market has moved quickly and rapidly in a way that is not sustainable – we have to confront some tough decisions and we will do that”

Now some of that will be referring to the upcoming changes in the RMA. But make no mistake, he’s about to make it way tougher to invest into housing (if you’re an investor purchasing existing homes).

Bank’s are feeling it too. They’ve become a lot more sensitive to the social impacts of lending. They don’t want to be seen to be encouraging the property market (via increased capital availability) to take it out of reach of family homeowners.  

So here are some new ways that we could see the Government influencing this, aside from more LVR restrictions:

  1. The Big Kahuna:

The RBNZ introduces (directed by Government) a second RBNZ amendment act – changing the mandate of the bank to include housing affordability alongside monetary policy and full sustainable employment.

To actually implement that, the RBNZ would then immediately increase the RWA (Risk Weighted Assets) requirements for banks’ lending to investor rental properties. In short, it requires the banks to hold more capital against these loans making them less profitable.

Cue much higher interest rates for these loans as banks find them less profitable.

  1. Make interest payments on housing investments non-tax deductible (excluding new builds).

I can hear the cries of “this makes no economic sense” straight away but the Government won’t care.   And they did it in the UK in 2017 to stifle property investment.    

This would immediately make housing less attractive.

Incidentally, it’s not as bad as it sounds (net impact might by about 1-2% reduction in cash yield), but this will put the frighteners up the investor market.   I would still expect new builds to be exempt from this.

And why is this good for Agri?

Well, the amount of capital in the banking system is not reducing.  

Think of that balloon again – you squeeze one area, its going to pop out somewhere else.   Make some parts of the lending sector less profitable for banks and they will examine the profitability of other parts of their portfolio more favorably.  

Agri is one of them.

Scale is important here - take the below graph showing the change in lending in both Agri and Housing over the last 12 months

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Start controlling your banking in 2021 with these keys to success.

Jan 21, 2021 9:01:48 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Welcome to 2021 everyone!

2020 was an interesting year for farmers. When Covid initially hit there was significant uncertainty as to the impact on soft commodities, it would be fair to say that things did not play out anywhere near where most market commentators thought or feared, myself included.

Early estimates of a significant retrenchment in Dairy prices were well wide of the mark and even though venison, lamb and beef went backwards, they still didn’t plunge the depths that some might have feared.

Being prepared for all eventualities is a smart thing as a year seems to be a long time in farming and economic cycles these days.

For those of you that managed to get away, we hope you’re well rested and fired up for the year ahead. For those of you yet (but about to) to take a break, we’re now jealous!

As we step into 2021, we thought we’d put out some of the keys to success when dealing with your bank. All designed to ensure you remain in control of your banking process and get the best possible interest rate.   This is not an exhaustive list but will get you started in 2021.

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NZ Debt Growth Distribution Shocker - C’mon NZ Banks and RBNZ!

Dec 15, 2020 4:35:11 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Hate the Game, Not the Player. Spare a Thought for the Frontline Banker.

Dec 9, 2020 11:47:49 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew Laming, Director, NZAB

Imagine this scenario for a moment.  

You’re a dairy farm owner

Your dairy farm manager is doing your monthly feed wedge and he notices that there is a gap in supply and demand due to a poor start to the pasture growth in the month.  

But it is an easy and logical fix - he tells you that he needs to put a bit more feed in plus change the ratio of the feed mix. You do the numbers with him and it all makes perfect sense and delivers a tidy little profit.

So you, as the farm owner, go and speak to your feed supplier about getting some extra feed and possibly a slightly different mix.   

Your feed supplier knows a lot about dairy farming and a lot about feed.   

He knows that putting that feed in will make more profit.  

However, your feed supplier is not sure whether he should sell you that feed as he might be able to sell that feed for a better profit somewhere else.  

He is also a bit wary of selling feed to you, because you are a dairy farmer and he sells to a lot of dairy farmers already.    

You have always paid their bills, there is no issue there. Your farm is also having a fantastic year.   But your feed supplier is not interested in this.  

Eventually after plenty of time has passed and many discussions back and forth, you finally manage to agree with the supplier to get some feed - but only getting about half of what you need and it's also not really in the right mix ratio to get the most optimum performance.    

But you accept it - as what else can you do and its better than nothing.

The dairy farm owner goes back to the manager and tells him the news.  Rightly so, the farm manager cannot make any sense of this.

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Will the banks pass on the RBNZ’s cheap funding into the Agri market or are they going to keep fueling the housing market at the expense of the NZ productive sector?

Oct 30, 2020 1:41:41 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew Laming, Director, NZAB

By now you will have probably heard about the RBNZ’s “funding for lending programme” (“FLP”).   Put simply, this is a mechanism the RBNZ is going to use to allow the banks to borrow new (freshly minted) money directly off the RBNZ at whatever the OCR is at the time.    At time of writing this is currently being forecast to drop to as low as -0.5%.

 

The reason RBNZ wants to do this is to stimulate growth in the economy with lower rates.  

 

At present our Reserve Bank Governor cannot guarantee that low OCR levels will be effectively "passed on" with current RBNZ tools.

These days the OCR rate is not linked to the cost of bank funding as it depends on where the market for customer deposits is at.  Which have of late been much higher than the OCR– driven by the laws of supply and demand and the regulations that require banks to seek most of their funding from NZ customer deposits or longer dated offshore lending.  

So a currently low OCR does not equal a banks own funding costs.   Which means it does not equal low cost lending (well, not “low enough”). The FLP is designed to get cheaper funding directly into the market, which by default should lower all forms of funding for the banks.

 

So in short, Mr Orr wants cheap money out in the NZ economy to get things humming again.   Sounds great right?

Well, that depends on where it goes.

So far, the RBNZ has been deliberately non-descriptive about where banks have to place that $50bn .   FLP programmes around the world are not uncommon and learning has shown that the less rules placed on the banks for the “direction of funds”, the more likely that bank’s will use it ( a recent example of this going wrong was the govt guarantee scheme for bank funding -too many initial rules meant very little was leant out initially ).

The FLP may include incentives to encourage banks to use the funds to expand new lending. In other countries, banks have been given a more favourable interest rate or higher funding caps if new lending growth expands. However, the risk of the RBNZ being too prescriptive is that Banks see too much red-tape or complexity making access to the new funding too onerous.

 

In order to predict where funds might flow, let’s step back and consider all the current elements of our banking system in NZ.

  1. We have central bank rules that mean home lending is much more profitable for banks than Agri or commercial loans (Banks have to put far less capital against a home loan = much better return on this investment)
  2. We have banks that are looking to lower overall costs, in particular the cost of their processing.   More, simple deals, more deals that fit into a box, less analysis of complex P&L statements all mean lower cost AI type lending decisioning.
  3. We have banks that are commercially owned. Naturally they want to maximise profit and return to shareholders.

 

So put these elements together with $50bn of newly minted low cost funding thrown into the mix?   I think we can already see that the vast majority of the new funding will be going directly to new house loans.

We’re already seeing this happening in the market, before this scheme has even started.   We can see it in the streets and in the news.   Lines of people at open homes, frequent outlandish examples of auction prices going for above CV and a real air of FOMO with buying houses again.

It's self-perpetuating- more lending to a sector in itself makes the initial lending less risky for the bank.   Chuck more capital liquidity at a market and asset prices will rise.     NZ housing has benefitted significantly from this over a very long time - no different to what Farmland values did when we had double digit increases in farm debt over 2000-2014 (with a break in between for the GFC).

Don’t get me wrong, higher house prices will stimulate the economy.   Higher house prices will make everyone feel better again, spend money, keep jobs. It’ll encourage the construction sector plus all those allied to it. Also, many businesses borrow against their homes as a cheap source of funding.  

 

But can’t we do a little better than this?

Come back to Agri.   This is a sector that is currently experiencing near record profits. Farm cash yields are now averaging 6-8%, way above their long-term trends and way above alternative investments.     Its exporting real stuff.   Stuff that other countries buy and give us money for.   Export receipts. Absolute gold in a world with significant domestic consumption risks and where our key tourism sector looks like it will be in the doldrums for some time to come.

But guess what – Asset prices in Agri have fallen.   And guess why?   In large part due to reticence from Banks to provide more capital to the sector, due to banking regulations that have been inadvertently set up to discourage lending to the sector because of a perception of higher long term risk.  

And just like the housing market, this becomes self-fulfilling, but in a negative way. Less capital to the sector = lower asset prices.

 

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Holiday Spending, Bank Losses and Where is Agri Lending Appetite Heading to Next?

Oct 15, 2020 2:11:56 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew Laming, Director, NZAB

Last week I was fortunate enough to have a week off with the family and we thought we’d do our bit for the South Island tourism sector. Although this meant a different thing to our three girls who thought that retail therapy was their part in the revival!

We went to Queenstown for a few nights before hopping over to Doubtful Sound for an overnight trip and then onto Milford sound for a similar experience.   Queenstown was nicely busy (without being frantic) and the tills and restaurants were ringing.  

However it was a much different experience in Te Anau and Fiordland where the customer numbers were clearly a shadow of their former selves.   Whilst it was nice to have more space, it did fell a bit eerie at times.   If you get a chance, get out and spread the business around NZ, you will not be disappointed!

 

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Is it time the RBNZ went into bat for farmers?

Jul 31, 2020 5:02:55 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Andrew- cropped for social mediaAndrew Laming, Director, NZAB

 

There’s no debating farmers are a vital part of the economic recovery journey for New Zealand, so it’s time they get the lowered interest rates they deserve.

Firstly, a bit of background.

The Reserve Bank of New Zealand (RBNZ) regulations stipulate that banks have to hold significantly more of their own capital in a farm loan than they do in a home loan. They put this differentiator in place after the significant run up in Agri debt prior to the Global Financial Crises (GFC) - as this, combined with the subsequent retraction in commodity prices, caused a near meltdown of the system.

Rightfully so, they wanted to prevent this from happening again.   However, in hindsight, things never really panned out to be as bad as what they thought; whilst non-performing loans ran very high post GFC – they have improved considerably to where they sit today. Banks also didn’t experience the losses they all thought they might.  

Sure, things aren’t perfect out there, but the risk that each bank was facing back in GFC times, versus in real time today is considerably different.  

This graph below is a good illustration of the relative change in risk for the Agri lending sector over this period.

 

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Updated Agri Bank market share data throws up some interesting insights

Jun 12, 2020 9:07:32 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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The RBNZ has just updated their Bank dashboard data for the quarter ended 31 March 2020.  It’s a chance for us to dive into the numbers and see what’s going on.   Remember, a bank’s appetite can be driven by these numbers (both proactively and re-actively – i.e what they are doing now and what they intend to do) so that’s why we’re across them.

 

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The folly of Bank SQ testing is leading farmers to bad investment decisions.

Jun 4, 2020 3:53:48 PM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Don't just dump your budget with the bank!

May 21, 2020 10:53:12 AM / by Andrew Laming posted in Debt, Action, Planning, Budget, Banking, Strategy

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Don’t just dump your budget with the bank – You’re missing a golden opportunity to showcase your business and control the terms of your lending.

 

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